Cisco’s largest acquisition to date is a deal worth $28 billion to purchase US software company Splunk. The US tech group wants to expand its cyber security offerings and take advantage of the growth in artificial intelligence.
The San Jose-based company, which will pay $157 for each Splunk stock, represents a 31 percent premium over its closing share price of Wednesday, and creates one of the largest software groups in the world.
This is the largest tech deal in a mergers and acquistions market that has been quiet. The cost of financing transactions has increased due to rising interest rates and an increasingly restrictive antitrust environment.
The deal will help Cisco boost its software business. This relies heavily upon AI and offers a variety cyber security services such as tools that protect digital businesses and users from data breaches.
Cisco announced on Thursday that Gary Steele, the president and CEO of Splunk, will be joining Cisco’s executive team once the acquisition is complete.
Steele stated that the deal will accelerate the San Francisco based company’s mission to “help organisations become more resilient while delivering immediate value to our investors”.
Splunk was founded in 2003 and is used by businesses to sort through huge amounts of data, identifying security threats that may affect their business. This deal represents a major achievement for the company that made its debut on public markets in 2012 with a valuation of almost $1.6bn. The deal boosted its stock price by more than 20% in Thursday’s pre-market trading after it was announced.
Splunk reported a revenue of $3.9bn for the quarter ending July 31, up 16 percent from the same period in the previous year. The company’s quarterly revenue was $910mn. This exceeded analysts’ expectations.
Splunk has been targeted by large US investors in recent years. They bet on the turnaround of the business, as it transitions from licensing to subscriptions and sees a rise in demand for its cyber-security products.
Starboard, an activist investor, announced last year that it owned a 5 percent stake in Splunk. The company was “plagued with mis-execution”, but the valuation could rise if the operational performance improved.
Silver Lake, a US private equity firm, invested $1bn in convertible debt in Splunk and gained a board position in June 2021. Hellman & Friedman (another large private equity firm) invested $1.38bn ten months later to create a 7.5 percent equity stake in the company. They also took a board position.
Cisco stated that the merger would result in a positive cash flow and boost its gross margins within the first year of the closing. The company expects to complete the deal before the end of 2024’s third quarter.
Antitrust regulators will be watching the transaction closely, especially in Washington where they have been critical of big deals in the tech industry. The transaction could be delayed if competition watchdogs conduct a thorough investigation.